Whoa! Hold on there... I noticed a couple descrepancies on the vacuum timing discussion. (not picking on anyone, intentionally
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Your distributor has a slider plate which allows the vaccum advance arm to pull it to the retard position when vaccum is present.
Actually when vacuum is present, it should be 'advancing' and timing not retarding it as long as it's hooked up right. Now this goes for both single and dual diaphram advance units. When I say advance unit, I'm talking about the device on the front of the distributor that has either one or two vacuum lines running to it. Now here's the catch- the majority of the mustang II's have what's called a dual diaphram advance, easily identified by the advance unit having two vacuum ports. The forward most port, usually pointing tward the radiator in some fashion, is the "advance" part of the unit. The other port, usually pointing tward the hood, is called the "retard" part. The retard part of the unit runs off of 'manifold' vaccum aka- constant vacuum at idle. But the trip from the manifold to the retard side of the advance is accompanied by temperature sensed valves that are located on the intake and T-stat housing. These valves control when the 'retard' is applied in relation to engine temperature. On the 'advance' side normally you only have one line running directly from a port on the carb. I can't remember for sure, but I know I've seen this line Tee'd before and a third line running to another component. Just can't remember what it was. This line runs off what is called ported vacuum aka- vacuum present when carb is throttled, but NOT at idle. If you do have vacuum present at this port and you're sure it is the correct port, then you have internal carb issues and the carb will have to be repaired/rebuilt.
Now since you're in the state of washington, your smog system is allowed to be non-op so to make your troubleshooting easier, plug and cap the retard line at the manifold vacuum tree (usually at the back behind the carb) make sure the advance line has a straight shot (nothing else feeding vacuum off of it) to the distributor and that it's pluged into the proper port (on an autolie/motorcraft carb- on RH side (pass) just below and in front of the choke housing, may be blocked a little by a heat plate)
connected it should advance even more.
No it should not. If the carb is properly set up there should be NO extra advance unless you throttle the carb. If you do then your primaries are open to far to attain proper idle.
If you can isolate where exactly the tranny leak is comming from we could probably give you a better idea as to what is the villian. The torque converter seal is probably the worst and last part you want to leak because you'll have to divorce the tranny and engine to fix it. The rest of the scenarios the other members described are not difficult at all to fix.
Hope I didn't bombard you with too much info. I just like to breifly explain how it works before getting into how to fix it, to help you to better understand what you're doing.